Built on the backs of first home buyers

Last week, several newspapers ran a story in which the Labor Opposition criticised the New South Wales Liberal government because the number of first home buyers had plunged after the first home owner’s grant was ended for existing homes.

A photo of acting Opposition leader Linda Burney looking out sternly and sincerely accompanied the article, as she intoned in The Sydney Morning Herald's text that the Liberals had abandoned first home buyers:

"The acting Opposition Leader, Linda Burney, said this decision and the axing of stamp duty exemptions for first home buyers of existing homes from December 31, 2011, meant the New South Wales government had 'abandoned first home buyers'.

"'These figures clearly show [Premier] Barry O'Farrell has locked first home buyers out of the property market with his cuts to stamp duty exemptions and first home buyer bonuses,'' she said. ''The worst loan approvals for first home buyers in 20 years should be a wake-up call for the O'Farrell government. Their approach clearly isn't working'."

What bollocks. First home buyers weren’t locked out by the ending of the first home vendors’ grant: they were locked out by the impossibly high prices that this grant has helped generate over the 30 years since it was first invented. And its purpose has never been to give first home buyers a helping hand: it has always been used as a way of giving the economy the economic equivalent of a steroid injection. First home buyers have instead been the sacrificial lambs of an asset-price-inflation route to apparent national prosperity.

This was why Bob Hawke’ introduced the first home owner’s grant in the first place back in 1983. Bob Hawke had just beaten Malcolm Fraser in an election over the level of unemployment, and his advisors suggested a grant as a way of reviving the housing market, and perhaps the economy. It worked a treat, and that (plus speculative lending to finance the Ponzi schemes of Christopher Skase and the rest of the White Shoe brigade) enabled Paul Keating to claim the mantle of 'World’s Greatest Treasurer' in the 1980s.

But the grant also supercharged house price rises as well, so each boost to a flailing economy flailed the chances of first home buyers being able to buy a house in the first place. The impact of the grant on house prices is obvious when you look at movements in house prices before it was introduced, after, when it was in operation, and when it was doubled (or trebled, as under Kevin Rudd).

Before the scheme was introduced, the difference between the quarterly change in consumer prices and change in house prices was a measly 0.07 per cent – basically a rounding error away from no difference at all, given that there was a range from as much as a 5.5 per cent fall to a 3.9 per cent increase per quarter over those three decades (I start from 1951 because that’s several years after rent-control legislation was abolished, which led to a rapid spike in prices for a few years – and Yes Virginia, there was a time once when governments tried to keep rents low, rather than trying to keep house price rises high).

After its introduction, the average quarterly change in real house prices has been 0.81 per cent – something you can "bank on”, so to speak. This is when the myth that house prices always rise took hold in the Australian psyche – without the awareness that this was not a natural phenomenon like sunrise, but took not only rising leverage from the banks, but also active intervention in the property market by both state and federal governments.

When you drill down further into the data, the evidence that the first home vendors’ grant played a significant role in causing the Australian house price bubble starts to look like a smoking gun in America (and denials of any role for it in the bubble by the local spruikers starts to sound like the NRA choir in America as well).

There were periods since the first home vendors’ grant was first introduced where the grant was completely removed across the nation: between the mid-1980 and 1988, then after 1999 and before 2001. In those between-FHVG periods, the rate of quarterly price increase dropped to 0.26 per cent – chicken feed, but maybe enough for some people to consider speculating in property over putting their money in a bank account.

But when there was a first home vendors’ grant in operation, the quarterly rate of increase in real house prices was 2.18 per cent – a huge return. And when the government was so 'generous' to first home buyers as to double or treble the grant – under both Howard (Liberal) and Rudd (Labor) – the quarterly rate of increase rocketed to 3.1 per cent.

Table 1: The First Home Vendors Grant and quarterly change in inflation-adjusted Australian house prices since 1951

Real House Prices and the FHVG
Change per quarterBeforeAfterAll DataDuring BetweenDoubled/Trebled
Mean
0.07 per cent
0.81 per cent
0.42 per cent
2.18 per cent
0.26 per cent
3.10 per cent
Min
-5.53 per cent
-3.83 per cent
-5.53 per cent
-2.21 per cent
-2.23 per cent
-0.91 per cent
Max
3.91 per cent
7.86 per cent
7.86 per cent
7.86 per cent
3.03 per cent
4.93 per cent
Std. Dev.
1.73 per cent
2.20 per cent
1.99 per cent
2.72 per cent
1.27 per cent
1.84 per cent
Count
131
115
247
25
50
7

So the real beneficiaries of the first home vendors’ grant weren’t the poor first home buyers, but those selling their first homes to them – which is why I call it the 'vendors grant' – and the banks, who took the extra deposit the first home vendors’ grant gave first home buyers, and ladened them up with initially three and ultimately over ten times as much more debt.

Its role as the "Lance Armstrong” of macroeconomic policy is also obvious when you see how the first home vendors’ grant was often motivated by a recession or the fear of one.

Figure 1: The FHVG, Australian real house prices, and unemployment

image

The only time that rising unemployment didn’t result in the government introducing a first home vendors’ grant was after the 1990s recession, when Bob Hawke’s reintroduction of the grant caused the biggest house inflation bubble in Australia’s history, and its moderate bursting caused "The Recession We Had to Have”. The reason why it didn’t then is neatly summarised in a famous Keating aphorism: "a souffl doesn’t rise twice”. Having caused the biggest spike in real house prices ever, it wasn’t possible to do the same thing again immediately.

And it shouldn’t be done again now either, after Rudd’s doubling and tripling of the grant in 2008-2010 caused the last price spike.

The grant should be abolished, and governments should keep their hands out of asset markets. The O’Farrell government is still in there with its grant to purchasers of new properties, but that isn’t as damaging as the broader grant to buyers of existing properties as well. In that sense, I applaud the O’Farrell government for limiting the damage done to first home buyers – and indeed the economy – by the grant.

Linda Burney, let's leave it that way.

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.

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Anonymous,

People cannot for whatever reason save the money required for a deposit so give them a leg up so to speak and give them a grant (Built on the backs of first home buyers, January 21). This means that many people who cannot actually afford to save/ buy/ maintain/ purchase their own home will be brought into the fold. What happens five or ten years later when additional money is required to maintain/repair/develop the property? Do these people then slide into disrepair and eventually are forced to sell? Owning a home is a constant cost and homes are only buildings and need constant attention. If you cannot discipline yourself to save and introduce some equity into the equation and if banks finance at 100% (more?) then what hope is there? Hello sub prime!!

Anonymous,

Put simply...$7,000.00 geared at 95% = $140,000.00 in additional Capacity/Debt, that Peter Costello gifted to "wet behind the ears", Home Buyers, who thought they'd never see so much money thrown at them to buy a home (Built on the backs of first home buyers, January 21).
To Bruce Moon: Land banking may have had a little to do with it, however the FHOG benefited those that owned established property "predominantly".
Costello shamed banks into using the $7,000.00 grant to gear into capacity and the banks went willingly.
As an example: In Southern Brisbane, Kingston, Woodridge and Logan, were the established "First Home" suburbs average price was $67,000.00.
With the FHOG, it allowed all these buyers to jump the border into more affluent suburbs, pushing these prices up. One house in Wishart sold 3 times in 8 weeks with incremental jumps of $45,000.00...not bad money if you can make it.
Of course today, Kingston, Woodridge and Logan are once again the First Home Owner suburbs, only they are 4 times the price they were and as they are always in the national news for the wrong reasons, they are being rushed with buyers.
5% of $67,000 is a little easier to come up with than 5% of $260,000 so the "State Sponsored" debt creation scheme of Home Buying has been a great success and an even greater failure...again.

Anonymous,

It's good to see this point being more directly addressed and put to politicians (Built on the backs of first home buyers, January 21). The FHBG was a waste of taxpayer's money and market dynamics ensured that the original aim of assisting FHB was never realised.
Despite originally well intended, the grant should be seen as a failed experiment however restricting the grant to new homes only was certainly spot on- first demonstrated successfully by the past Vic state labour.
We can substantially improve our fiscal position by adding taxes on land banking, restricting federal grants to new properties only so that all taxpayer funds are more focused on stimulating real economic activity & employment. This way the stimulus would be more effective, as well as saving money at the same time.

Anonymous,

The FHVG is part of a bigger problem: protecting the housing industry from the full workings of an open market (Built on the backs of first home buyers, January 21).
Fixing the issue would be part of wider reform including: reduction in availability of negative gearing, no grants and reduction in stamp duty to a fee that closely resembles the cost of "Stamping" i.e. $200. Maybe introducing capital gains in some part.
By the way a large part of escalating prices as you have pointed out is easy availability of credit.

Anonymous,

Great article - but "ladened"? Whatever happened to "loaded"? (Built on the backs of first home buyers, January 21.)

Anonymous,

Abolish all stamp duty on purchases of property and all land tax and replace both with a property tax on all properties. (Built on the backs of home buyers, January 21)
That will get the property market moving.
I have suggested this to governments of both major political persuasion over the past ten years with no success.
Failure to implement the scheme has potentially cost NSW over $6 billion in lost revenue between 2007-2012.
That would have gone a long way to plugging the holes in the health and education sectors besides funding our emergency fire services, police, roads and hospitals.
Until politicians stop playing politics and consider the welfare of those who elect them to power - the Linda Burney's of this world will gain the headlines in the media.

Anonymous,

Well said Steve, keep the bloody government away from housing, they cause too many problems (Built on the backs of first home buyers, January 21).
Hawke brought in housing stimulous (first home buyers), because the economy was stuffed.
The housing market as viewed by all politicians is a way of increasing, growth, employment and liquidity, rapidly.
It is what pollies do when the economy is crawling along. It always happens! So be aware that the Australian economy is on that same track right now.
What we should be doing for those pollies with the cognitive ability to imagine, is cutting building costs!
So, how does one do this? Reduce energy costs for manufacturors. You know, they are the people that make bricks, roof tiles, glass, window frames, treated wooden frames, copper wires, paint, nails, srews, fire doors....etc.
All of the above mentioned come from, high energy, cost/production.
And all the time the pollies were telling you that housing, prices would fall - when they killed the economy.
Me, I'm telling you that housing costs will fall when we expand the economy.
You can choose, the one that makes sense.

Anonymous,

The most devastating number here is that home owner ship has dropped from 80% to 60% in ten years. That is a monstrous drop and shows how many people are priced out of home ownership in Australia.
I'd like to see (Built on the backs of first home buyers, January 21).
* FHOG on new properties only (if at all)
* Negative gearing reduced to one property only per investor at a time.
* Land tax increasing every year for land that sits undeveloped to prevent the artificial inflating of prices by developers restricting supply by land banking.
Reducing the negative gearing and FHOG saves governments money and increasing the tax on undeveloped property makes the government money. So its a win/win for them. It would also improve buying conditions for genuine first home buyers.

Anonymous,

The wool floor price scheme in the late 80's showed convincinly that the government 'must' not interfere with ANY asset class, commodity or marketable asset of any type. Period! (Built on the backs of first home buyers, January 21.)

Anonymous,

@ Angie Brabet
I remember an episode of the Simpsons where Homer said "facts are meaningless, they can be used to prove anything" (Built on the backs of first home buyers, January 21).
The same can be said for the reduction in home ownership in this country - an increasing population leads to a decrease in home ownership (vis a vis).
Home ownership is not the best use of invested funds - continuing cash outflow against limited cash outflow from a rental - the cash differential only needs to be invested in a low interest saving account to match the returns on the housing market over the long term.
Take away negative gearing, the market tumbles, rental prices increase and you have a generation of homelessness. If there are people out there who want to pour money into a bottomless negative gearing money pit - good on them.
Take away the grant and the builders cry poverty - something I wont be to sad about given close to 60% of WA's top 50 rich list have made in property of some sort (mostly building and developing).
Disallowing deductions for negative geared assets will only drive accountants rates higher as they figure out creative ways to force the hand. What about property trusts?
Good luck with the banks on this one. They have a vested interest in the investment property market, do they not?

Anonymous,

Great article Steve (Built on the backs of first home buyers, January 21).
This 30 year Ponzi scheme means many Australians currently in the first home owner age group have only ever known rising house prices. Ironically it is these people who are going to get burnt and the baby boomers who are walking way with their cash.
And heck - the BBs are on to a good thing - so not many of them are going to be the whistle blower on this ongoing intergenerational Ponzi scheme - they had their way ripping off Gen X and now they are moving on to ripping off Gen Y who will probably left holding the parcel. Thank heavens for Steve Keen.

Anonymous,

I agree, stop the first home buyers grant. There may be a better way - A First Home Owners Loan (Built on the backs of first home buyers, January 21).
Provide say $20K interest free to all first homeowners, with no monthly repayments. The loan only gets repaid when the house is sold, whether that is in 2 years or even 40 years. Register the encumbrance on the title.

Anonymous,

@ ken McAlpine (Built on the backs of first home buyers, January 21.)
Cutting building costs would not improve housing affordability as the more money available to the buyer would simply be capitalised into the land values, just the same as any other improvement in productivity of the community.
@ Blake Hansen
Re your assertion that taking away negative gearing would cause rental price increase, as has been incorrectly claimed when the Hawke Government quarantined negative gearing in 1986 see
www.theage.com.au/business/time- to-change-the-unfair-rules-for-
negative gearing-20110424-1dsu6.html
Saul Eslake said "Not withstanding this history, suppose that a large number of landlords were to respond to the abolition of negative gearing by selling their properties. That would push down the prices of investment properties, making them more affordable to would-be home buyers, allowing more of them to become home owners, and thereby reducing demand for rental properties in almost exactly the same proportion as the reduction in the supply of them."
UK and USA do not have negative gearing and have thriving rental markets.

Anonymous,

Good article (Built on the backs of first home buyers, January 21). Just to add - all those FHBGs created too expensive ausi labor force. Ausis can not afford to work for small salaries having such property bubble (and public still foolishly trying to support that bubble!!!), so companies found the answer - just outsource staff (owners of ausi companies don't care about ausi property bubble, they care about companies profit!!!). Final result for ausies - NO SALARY AT ALL !!!

Anonymous,

@ Alex Fletcher
I stand corrected.
I note that Saul Eslake says "That would push down the prices of investment properties". Do you consider your house an investment, and would you like the price of that investment to fall whilst your mortgage remains unchanged? (Assuming you have both). (Built on the backs of first home buyers, January 21).

Anonymous,

The only solution to the housing problem is to tackle it directly, not to try and increase the ability of fresh entrants into the market by giving them a "grant" towards their first home (Built on the backs of first home buyers, January 21). Such a strategy could never work in a market where Auctions set the prices. All that happened to the ownership grants was that they went on the house price. It was money down the drain. These grants could be correctly identified as disguised stimulants aimed at causing inflation, thereby securing the votes of house owners by increasing their property values, whilst gaining the votes of purchasers by deluding them that their problems had been made easier
What is needed is government owned public housing that can be rented out - or sold off to reliable tenants at near cost prices, appropriately using available land. Travel around a city such as Sydney and you will be surprised at just how much available land there is
Where land is left undeveloped it is not unreasonable, after consultations, for a compulsory purchase order to be issued. City land deliberately left undeveloped is not a neutral investment that has no effect on society generally. Whether for the creation of green open spaces, or as sites for homes and businesses, land in cities should be used. In some cases land is available close to and over railways. There are many possibilities in our crowded cities.
Purchase grants are really only suited to items that are not scarce. That is basic economics. Mr Keen here told it as it is. In my opinion the grant money could be better used for the direct consruction of homes.

Anonymous,

At least in Queensland, undeveloped land is hit every year with Land Taxes which drive development - without income from the land the taxes can be crippling. Of course, for land banks, those taxes just form part of the ultimate sale value of the land to the punters (Built on the backs of first home buyers, January 22).

Anonymous,

At last, someone writing a view which makes sense(and I happen to agree whole-heartily with)that does not occupy itself in the comments section (Built on the backs of first home buyers, January 22).
Aside from the fact that I have never received a grant of any kind as I first purchased an investment property in 1985,(born either too early or late) I believe it persuades people to get in mortgage debt and the extra commitments of insurance,council,water and possibly strata rates that they may not be able to afford. Also I think it unfair that collectively taxpayers should assist with the purchase of personal property.
Can you imagine a first car or shareholders grant as it is every australians right to own one of these items. I think FHOG and stamp duty exemptions are just as ridiculous.
It will also give more predictability to the market as it won't be artificially manipulted at the whim of the politicians of the day winning short term votes.
Anyone know how much has been given inngrants and exemptions? I would estimate $50,000,000,000+ in the last 12 years. For what? How has it benefitted, especially if all the grants are evaporating as prices fall.

Anonymous,

It needs to be remembered that the original $7,000 FHBG was meant to be compensation for the effects of the GST. Basically, the modelling showed that the GST caused house prices to go up by $7,000 and this was capitalised by owners, so compensation was warranted (Built on the backs of first home buyers, January 22).
The real value was meant to erode over time, just as the real boost to prices caused by the GST has eroded over time. By my reckoning, $7,000 in June 2000 is worth around $3,000 today.

Anonymous,

@ Blake Hanson
1. Total removal of FHOG was not stated. Application only to new homes was. This will stimulate the construction of new homes and the boom the RBA wants (Built on the backs of first home buyers, January 22.).
2.You said Increasing population decreases home ownership." ?? Citations and examples please. An increase in immigration should result in a construction boom in property.
3. Removing negative gearing was not suggested, reducing it to one property per investor was.
May I suggest that you clearly read a post before you respond to it. Your quote from Homer Simpson applies here. I don't believe that Business Spectator has a comic section, although it does appear to have some clowns.

Anonymous,

@ Adrian Breau (Built on the backs of first home buyers, January 22.)
Re "for land banks, those taxes just form part of the ultimate sale value of the land to the punters".
Land value tax cannot be passed on to the buyer because the vendor is already charging the market price. The same applies to the landlord/tenant situation. As you say "in Queensland, undeveloped land is hit every year with Land Taxes which drive development". Those taxes are an incentive to use the land or sell it, so without the tax the land price would rise in proportion.
It is the tax the buyer pays anyway, either in their mortgage with decades of interest payments or as a lower annual tax to the government allowing reduction in other taxes they pay such as income tax, payroll tax which are economic deadweight taxes.
Land has a value which is actually created by the community. If no one lived or worked in the centre of Sydney the value of land in its main streets would be minimal.
Property is the basic asset that allows our economy to run. It's crazy that we allow people to hoard it.
Economists such as those of the Henry review and the Turning Grey into Gold report recognize that and recommended replacing stamp duty and the existing inefficient land taxes with a broadbased land tax. Property tax is also in the policy of the Liberal Democrats in the British coalition government.
At least that would justify further research on land value tax. It is in wikipedia, and even conservapedia gives it a good wrap.

Anonymous,

@ Blake Hansen
If you read his words in context Saul Eslake is not saying abolition of negative gearing would cause landlords to sell, rather he is using such a hypothetical situation to illustrate that if they did it would not cause rents to rise (Built on the backs of first home buyers, January 21).
Most of the 1.1 million negative gearers have been "Mum and Dad" investors (average income $80000)
who have probably not done well if they bought at the peak of the boom. They are also the generation helping their children either buy a home or assisting with the financial stress associated with huge mortgages. (The Sandwich generation SMH 28/7/12)
They were drawn into the property market by negative gearing which did not increase the stock of rental housing as 92% of funds went into existing houses. However it would have been one of the factors (along with the credit boom, population growth and minimal taxes on land)contributing to unaffordable house prices for their children.
It has been a 34 billion tax giveaway to people who already own a home.
The real benefit would have gone to Australia's property billionaires in getting two generations to go into debt and compete to bid up the value of property portfolios. Both the negative gearers and their children have been had.
The Henry report did not advocate an end to negative gearing. Perhaps it should be left in place for existing investors.
Limiting it to new buildings only is an improvement but considering the land banking by developers and other speculators it may still be an extra contributor to unaffordable housing for first home buyers.

Anonymous,

If young super fund members could do a one off withdrawal of their super funds, for a home deposit, like our neighbours in New Zealand can do now, there would be no need for a first home grant (Built on the backs of first home buyers, January 21). The current SGC super system is yet another form of Government interference preventing self funded of house purchasing

Anonymous,

Keep residential properties out of everyone’s investments for basic human rights and a happier society! (Built on the backs of first home buyers, January 21.)
My opinion for what it's worth to you all is, residential housing is everyones basic necessity, and should be everyones equal right in life in have a fair go at being able to buy and afford their first home. However the problem i can see is the fact that anyone can invest in residential property and this no doubt puts unfair imbalanced upward pressure on housing prices, placing it well out of reach of many Australian people and setting up our Australian society for a very large gap between the have and have nots. This is very unwise! The Australian government should place a ban on everyone except first home buyers from investing in residential property which would in time bring prices back to being affordable and give first home buyers a fair go. End result = people can afford to buy their first home and pay off their mortgage sooner giving everyone more money to invest for retirement and to spend = good for economy and a happier society as a whole? When investing we should think to check that we are not denying others of their basic equal human right to own their own shelter too. I fear that by people continuing to invest in residential property that is what it is causing with the unfair imbalanced upward pressure on housing prices that will affect everyones familys eventually.

Anonymous,

In the U.S., after our one-time first time homebuyers credit, and credit to move-up buyers expired, the median value of house went up an almost exact amount of the buyers credit, and then within a year or two depending on market, value of houses went back down to their original trajectory. So all the buyers credit did is inflate the price of the house the buyers were buying and leave them underwater on the mortgage within a year or two. But as Steve said, it was great for our baby boomers who were selling and had missed the 2006 peak, they got one more boost in price as they sold (Built on the backs of first home buyers, January 31).
If I were in Australia I would look at U.S. and Japan's real estate price history and realize something like that could happen to you. Do you want $500k of debt on an asset worth $300k. In U.S. banks will let you short sell (sell for less than what is owed) and govt has waived taxing people on the value of the debt forgiveness, for now. Also you can get foreclosed on and simply owe the keys to the house, no liability or det beyond that even if the foreclosure makes far less than mortgage. Also, in some states, foreclosures have lots of legal obstacles so some can live in house rent/mortgage payment free for years, til they get kicked out. Do these things apply in Australia or will homeowners there always be beholden to the debt they have taken on, sort of like our poor college kids and student loan debt they can never default from? If it is the latter, I would get away from house debt now!
Komatsu is reporting much lower earnings due to slow down in Asia, how many more ghost towns does China need? China economy in general may be fine but they will not need to build at speed they have, what will that do to Australian economy.
Save yourselves....